Most large banks couldn't care less about their traditional
and important function as prudent capital allocators.
They've been incentivized not to.
I doubt you think banks are socially irresponsible, but I
And while I'm personally appalled at the incestuous nature of
our banking system with corporations and governments, I'm excited
about an alternative to banking that's stepping in to fill the
gap between "too big to fail" banking behemoths and the regular
people and businesses they no longer serve.
But before I get into the opportunity, a quick refresher on
why it's clear to me that banks are socially irresponsible
First off, explicit and implicit government guarantees ensure
banks remain cauldrons of moral hazard and ruinous risk taking.
Government actually incentivizes bankers to act not only
irresponsibly but reprehensibly.
History is replete with examples of bankers responding to the
incentives. The latest example occurred in 2008. The entire
banking system was brought to its knees by unconscionably
leveraged bets on exotic collateralized-debt securities and
These bets - technically trades - had nothing to do with
traditional lending, and everything to do with maximizing
short-term return on a bet. There was little for the banker to
lose: If he hit pay-dirt, he received a multi-million dollar
bonus. If he rolled snake eyes, the Federal Reserve and you and I
made good on the bets.
It's bad enough when bankers get away with socially
irresponsible behavior once, but they get away with it
repeatedly. And they are getting away with it to this
After getting a finger wagged at them and being infused with
trillions of dollars by the Federal Reserve, banks were soon
betting big again. Last year,
JPMorgan Chase (
lost nearly $9 billion in botched trades that were laughably
filed under the rubric "risk management."
We should expect to see more botched trades and more bad bets
in the future.
The January/February 2013 edition of
Wells Fargo (
, a "conservatively" run bank.
reveals Wells Fargo is hardly conservative. According to
writers, Wells (and other big banks) remains a black box that
conceals enormous risks on trillions of dollars of notional trade
volume - the sort that took down the economy five short years
And yet the money keeps rolling into the banks... and rolling
out to the bankers. CNNMoney reports that the nation's biggest
banks are expected to parcel out more in compensation in 2013
than they did in the four years, including $23 billion in bonuses
- a 15% increase over 2012 bonuses.
Much of these bonuses are tied to trading, not lending.
Indeed, banks are actually paid by the Federal Reserve to hold
reserves at the Federal Reserve. It is unprecedented in banking
history for a central bank to pay a commercial bank not to
You shouldn't be surprised, then, to learn bank credit has
been contracting for years. No let up is in sight: Bank credit
has contracted in each of the past four months.
Fortunately the market is evolving to meet a need. I've found
an alternative to traditional banking that cuts big banks out of
the loop and passes bigger yields onto investors. At the same
time, it gives borrowers access to capital at a time when they
can't get it at a reasonable rate from the too big to fail
The yields are the real draw, of course. Instead of forking
your money over to a traditional bank for a 1% savings yield, you
can collect yields between 6-12% with this alternative.
And it's easier and safer than you think to make the switch.
to receive a special report titled
The Banker's Secret,
which shows you how To collect much bigger yields from your
savings by cutting the bank out of the process.